Europe Back In The Spotlight

Europe faded from the news over the summer.  European Central Bank President Mario Draghi’s shift to allowing his institution to serve as a lender of last resort calmed nerves and took the worst case scenario of imminent breakup off the table even though the program has yet to be implemented.  With crisis again averted, market participants shifted their focus to the Federal Reserve and the US elections.

In the meantime, economic conditions in Europe continued to slowly deteriorate.  We are now looking at another year of dismal growth in the Eurozone.  This crisis seems to have no end in sight.

To be sure, a little relief today as the Greek parliament pushed through the latest austerity package, throwing the bailout back to the Troika.  But the relief was short-lived.  Interestingly, the Greeks were rewarded with news that the next tranche of aid is not a done deal.  From Bloomberg:

Euro-area finance ministers may not make a decision on unlocking funds for Greece until late November as they await a full report on the country’s compliance with the terms of its bailout, a European Union official said.

Finance chiefs won’t make the call to release 31.5 billion euros ($40.1 billion) of aid for Greece that has been frozen since June when they meet in Brussels on Nov. 12, the official said today on condition of anonymity because the deliberations are private…

…The EU official said Nov. 26 is a possible date for euro- area finance ministers to sign off on the next disbursement of rescue aid to Greece.

I think I would have kept this under my hat until Greece votes on its budget this Sunday.  Still, I understand the hesitation.  I am guessing that the Troika increasingly sees no way out for the Greek economy, at least under the current policy path.  Does anyone really expect this to be anything more than just another effort to kick the can down the road?  Everything to date as simply intensified what Ambrose Evans-Pritchard described as the “Greek death spiral.”  Highlighting that outcome was today’s news that Greece’s unemployment rate in August rose yet again.  From Bloomberg:

The rate rose to 25.4 percent from a revised 24.8 percent in July, the Athens-based Hellenic Statistical Authority said in an e-mailed statement today. That’s the highest since the agency began publishing monthly data in 2004…

…A breakdown of today’s release showed the female jobless rate was 29 percent, while the rate for Greeks aged 15 to 24 was 58 percent. That’s more than double the youth unemployment rate of 24.3 percent in August 2009, before the extent of Greece’s deficit became known, sparking the debt crisis.

At some point, the austerity will become too much – and the rise of Golden Dawn, the neo-Nazi group in Greece, raises concerns about the ugliness that will ensue if Greece finally breaks.  At this rate, Europe is setting itself up to have a failed state on its borders.

Likewise, Spain too is an ongoing disaster.  Unemployment is currently expected to peak at 26.6 percent next year, and this I suspect remains too optimistic.  Yet the austerity continues.  Moreover, the pain is clearly expanding deeper and deeper throughout the Eurozone. From Reuters:

The European Union’s executive Commission said the 17 countries sharing the euro would grow only 0.1 percent in 2013 after a bigger than previously forecast 0.4 percent contraction this year as a result of the sovereign debt crisis.

But don’t worry, the future is bright:

Growth is predicted to rebound to 1.4 percent in 2014 as structural reforms now under way start bearing fruit.

Still the seemingly endless hope in the structural reform fairies.  Meanwhile, it is clearer by the day that Germany is the next to fall.  Also from Reuters:

Recent data from Germany, Europe’s growth locomotive and paymaster, has been largely disappointing, with business sentiment worsening, the private sector contracting, joblessness rising and industrial orders falling at their sharpest rate in a year, though consumer morale has held up and exports have leapt…

…While Germany’s economy long fended off the single currency bloc’s troubles, expanding by 4.2 percent in 2010 and 3 percent last year, growth slowed to 0.3 percent in the second quarter of this year from 0.5 percent in the first and some economists expect a contraction in the fourth quarter.

For their part, the ECB stood pat on rates today, as expected. From Bloomberg:

“We are ready to undertake” Outright Monetary Transactions, “which will help to avoid extreme scenarios,” Draghi said at a press conference in Frankfurt today after policy makers left the benchmark interest rate at a historic low of 0.75 percent. “The risks surrounding the economic outlook remain on the downside” and underlying inflation pressures “should remain moderate,” he said.

Really, 25%+ unemployment in Greece and Spain is not already an “extreme scenario”?  From my perspective, that’s pretty extreme.  Like Great Depression extreme.  Draghi also implied he is done helping Greece:

Draghi sought to end a debate on whether the central bank will do more to ease the debt burden of Greece, where Prime Minister Antonis Samaras yesterday gathered the support of enough lawmakers to pass austerity measures needed to unlock the next tranche of European funds.

The ECB can’t take losses on the Greek bonds it holds and has already distributed any profits made on them to governments, Draghi said.

“It’s up to the governments to decide whether they want to use these profits for Greece,” he said. “The governments actually committed themselves to do so. So, the ECB is by and large done.”

No more OSI for you.  Meanwhile, the ECB and Spain continue their game of chicken:

Spanish Prime Minister Mariano Rajoy said on Nov. 6 he needs to know how much the ECB would push down Spain’s borrowing costs before his government applies for aid and signs up to the conditions attached.

“It’s entirely up to Spain and the Spanish government to take the decision,” Draghi said. “The ECB can’t give any assurances ex ante. The Governing Council will take the decision in total independence. There isn’t any automatic quid pro quo.”

Given the path of Greece, it is reasonable for Spain to ask what exactly they would get out of the deal.  Because at least right now, you can make an argument that the ECB has no incentive to actually buy bonds if just by saying they are willing to buys bonds eliminates convertibility risk.  In that case, Rajoy gets nothing more from the ECB for his efforts.  It seems that the OMT will only be activated after sufficient crisis to push a nation into the loving arms of the Troika.  By that time, of course, it will be too late to prevent another round of economic deterioration.  With that in mind, see FT Alphaville for the latest on Spain’s financing problems and unrealistic deficit forecasts.

Bottom Line:  Yes, I remain a Euroskeptic.  Maybe it is just in my blood.  Europe still looks ugly, and will continue to be so for the next year at least (I tend to think wave after wave of austerity will push the Eurozone into a multi-year malaise, but let’s just take it one year at a time for now).  I expect European troubles will continue to cloud the global outlook and vex the earning plans of large multinationals for the time being.

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